Daniel Ltd sells one of its properties to a financing company with an attached call option,which allows Daniel Ltd to reacquire the property at a future date for $400,000.The current market value at the time of the sale is $300,000,but the financing company pays $350,000 for it.It is expected that the market value of the property will exceed $400,000 before the option expires.What is the appropriate treatment of this sale?
A) Record the revenue and make appropriate note disclosures about the call option and its associated risks.
B) Set-off the call option and the building - reporting changes in the difference between their current values as revenues or expenses as appropriate.
C) No entry would be required as the call option is off balance sheet and the building has not effectively been sold.
D) Record the inflow of cash and a liability.
E) None of the given answers.

Question

Quizplus · Accepted Answer

The transaction should be recorded as a financing arrangement, recognizing the cash inflow and a liability, as the call option indicates that control of the property has not been transferred.

Daniel Ltd Sells One of Its Properties to a Financing